Contract Clauses: Governing Law

Contract Clauses: Governing Law

Business Sale, Commercial Law

A governing law clause may include a:

1. choice of law clause, setting out the legal rules to govern the contract; and

2. choice of forum clause, setting out the judicial system with exclusive or non-exclusive jurisdiction to hear disputes.

The purpose of a choice of law clause is to avoid a dispute about the appropriate law to be applied. In most cases, in Australian courts, a choice of law clause will be upheld.

The purpose of a choice of forum clause is to minimise later disagreement about the place in which disputes arising under the contract should be litigated. Typically a choice of forum is made on the basis of the reliability and probity of the legal system chosen, the parties understanding of the rules of the court, and convenience.

Where a governing law clause is missing

Where a contract does not include a choice of laws clause, the principles of conflict of laws will apply. This can lead to unnecessary complexity and additional costs.

Drafting considerations

The parties should consider the consequences of a governing law clause. They are often included as ‘boilerplate clauses’ without proper consideration of their effect.

As noted above, relevant considerations include convenience, the extent of the party’s knowledge of the operation of the chosen laws, and the extent to which the chosen laws will modify the rights and obligations of the parties.